As a human being, the joy one gets from profit in a portfolio viz-a-viz temporary loss in a portfolio, is much lesser — also referred to as loss aversion where investors prefer avoiding losses more than acquiring equivalent gains.
Similarly in venture investing, so is the concept of Anti-Portfolio! This concept was introduced by the venture capital firm Bessemer Venture Partners, which documented instances in which the VC had the –
- effective opportunity to invest,
- opportunities that were declined for different reasons, and
- turned out to be notorious successes.
So anti-portfolio is the set of opportunities which were missed and in hindsight, turned out to generate high returns.
As an entity, which made its first venture investment in 2016, a similar anti-portfolio list exists in place — highlighting both the hits and misses, with the number of misses outweighing the hits.
Key Learnings
The primary lesson from reviewing an anti-portfolio is to avoid repeating past mistakes. Often, the reason for not investing in certain opportunities is a lack of sufficient data, especially when a company is attempting to disrupt an existing market and this uncertainty is the common thread across all such cases.
Nonetheless, we had a good beginning. The firm’s first portfolio investment was a disruptive one, driven by the strong execution of a team led by experienced but previously unsuccessful entrepreneurs.
The decision to invest was based on the team’s pedigree and focus, and the investment paid off as other high-profile VCs joined in subsequent rounds, demonstrating that, while data may be lacking in early-stage ventures, other factors like team strength and market focus can still make for a good investment.
Case Studies of Missed Opportunities
In one instance, there was a business-to-consumer (B2C) opportunity with young founders, met the promoters over a three-week period including discussions with multiple internal stakeholders. At the time there were few points in contention –
● Business model (which did change afterwards),
● Promoter role swap (which happened after 18 months),
● Valuation (sought valuation lower by Rs. 5 crore)
● Industry expert comments (stated that this is a difficult space, given the incumbents in play)
In the end, the decision was made not to invest in the enterprise and just 20 months later, a marquee VC firm joined the company’s cap table, and early investors achieved fivefold returns, not a bad multiple by any means. (Anti Portfolio)
Similarly, when we were contemplating the opportunity mentioned earlier, another opportunity in a direct-to-consumer (D2C) business was being explored with
– 50% margin business
– repeat customers
– social bonding
– first time promoters who were driven
– Positive EBITA and growth prospects
– Valuation (in line with expectations post negotiations)
Fast forward to recent times — the economic downturn in 2020 hit the business and the early mover advantage ceded, though the enterprise is still operational, with exit in consideration currently (Anti-Portfolio, this time in a negative manner).
Luck and Uncertainty
What is the role of luck in this whole affair?
When investing in disruptive opportunities, the future is unknown, unseen and unfelt. What happens in the ecosystem and the response/reaction to it, plays an important role.
We believe Lady Luck is in play, but then it only comes consistently to those who have worked hard and are prepared for the opportunities when they arise, allowing luck to enter (am I thinking too much ???)
What is also being noticed is that the best product or the best promoter (what is the definition of ‘best’?) needs to make the cut. It requires good communication, presentation and a need which the consumer believes is being fulfilled and the investor who also believes will rake in the dough
Takeaway
Typically, anti-portfolio brings in angst for the missed opportunities, but then one is just a step away from the next big thing.
By learning from these experiences and continuously refining investment strategies, investors can be better positioned for future opportunities.
Author:
Brijesh Damodaran
